The city of San Francisco is the capital of Silicon Valley. As such, it is home to numerous venture capitalists and tech start-ups. In Silicon Valley, money “ain’t no thang”. If it doesn’t grow on trees yet, surely some start-up will fix that soon.
Foreign investors, especially, love pumping money into Silicon Valley. Chinese companies and individuals invest in Silicon Valley as if it was a favorite pastime, as this recent article from the Wall Street Journal tells us. More on that later.
CityLab tells us that the current Bay area housing crisis is actually not directly a result of this monetary influx; the crisis is a result of City of San Francisco policy, denying construction of new homes. Homeowners in San Francisco are lobbying tirelessly to zone out new construction, and since the affluent influence, the city council is obliging. San Francisco property owners would rather new homes be built elsewhere, outside of affluent neighborhoods, or outside the city entirely. This is causing a supply crunch that is affecting the entire Bay area. No where do we see this policy have greater effects than in neighborhoods and areas termed, “up and coming”.
Up and Coming
Up and coming describes the residents and real estate in an area that reflects an older, more authentic, and often ethnic, period. The people living there are mostly working class, and most are lower to middle class. These neighborhoods are often prime for gentrification because they are attractive, with thriving culture and a vintage aura. In Chicago, areas that were once up and coming include Wicker Park, Ukrainian Village, and Logan Square. All have now been thoroughly gentrified. When new construction occurs in “up and coming” neighborhoods, initially supply increases, which lowers or holds prices steady in the area, but ultimately, prices jump as that supply is gobbled up by pent-up demand. Why is that supply so quickly gobbled up? Because new zoning laws get put in place to prohibit construction as “up and coming” becomes simply, “up”. As a result, the “up and coming” constituents slowly get priced out, and pushed out further, and further, and further from urban centers, until everything that came with a neighborhood being up-and-coming is gone. Those things include, laundromats, real coffee shops (not Starbucks), neighborhood food pantry, neighborhood pharmacy, diners, and other neighborhood staples that we used to take for granted. In their place? Five dollar latte shops and avocado toast brunch establishments, and Amazon delivery trucks. The reality of modern day gentrification is summed up well in the following quote from CityLab:
“Since the residents of high-cost, high-demand neighborhoods tend to have mobility, money, and access to information and power, they are hugely successful in leveraging land-use policies to exclude newcomers. They protect what is theirs and shut the gate behind them. (Nolan gets that.) So the high-margin development that really should go into the high-end neighborhood winds up replacing cheaper, older, and abandoned housing in low-end neighborhoods.”
And the funniest part of all, [and a great way to sum this up], also from CityLab,
“The new wealthy are ruining everything because the old wealthy decided not to let them live anywhere near them.”
In my home city of Chicago, I came across an article on the now defunct dnaInfo titled, Affordable Living ‘Is Just Going Away’ in Chicago as Multiunits Sell. I live in Lincoln Park. Lincoln Park is a predominately middle to upper class, white, older neighborhood of Chicago. It one of of Chicago’s oldest neighborhoods. It’s been around for a long time and within its boundaries lies DePaul University, a private Catholic university. Recently, multi-unit buildings are being sold and torn down. They are being replaced with single family homes that will sell for upwards of 2-4 million dollars, if not more. Here and there, they will be replaced with new multi-units, while will sell for in the high six to low seven figures. The biggest of these projects currently in progress is the Lincoln Commons project. Lincoln Commons will consist of everything from senior living to apartment/condos and boutique office space. On the leasing website for Lincoln Commons retail space, Hines McCaffery (the owner of the property) makes it clear who the residents of Lincoln Commons will be:
- More than 1,000 residents living at the Lincoln Common provide a captive audience of affluent shoppers and diners
The residential units at Lincoln Commons will be occupied by affluent consumers. Hines is publicizing this as a reason why retailers should take up shop there. Although we don’t have pricing information on these units, it’s safe to say that rents will be pushed significantly higher in the area (where many students, families, and older Chicago residents reside). Along with those higher prices, will come higher property tax revenue for the City of Chicago.
Housing for the Rest of Us
The Illinois Policy Institute put out a piece tilted, Zoning Restrictions are making Housing Unaffordable and Shrinking the Middle Class in Chicago, dated May 2016. In the article, the author states that,
“Zoning restriction are making housing unaffordable and shrinking the middle class in Chicago.”
First, there is a misconception that a booming economy automatically translates to booming real estate markets. This is not the case. Economies are cyclical, and therefore different sectors of the economy can drive the economies at any one time. On the flip-side, economies that are not booming also don’t translate into falling real estate prices. What does translate into changing real estate prices are the supply and the demand of and for, real estate. Chicago is a perfect example of this, and as the Illinois Policy Institute writes,
“High prices are not the result of a booming economy or more people trying to live in those neighborhoods. Quite the opposite: Chicago’s economy is sluggish, and people are leaving even prestigious neighborhoods such as Lincoln Park.”
Purchasing power in Chicago is going down. Chicagoans cannot buy as much as they used to with their dollars. Why? Because the cost of putting a roof over your head is skyrocketing in Chicago. A large part of that is being driven by taxation. We wrote an article on this, showing how Chicago’s gigantic tax increases over the last few years since 2013, are all going towards funding pension liabilities. The bottom line? The rising costs are not going toward making the city better, like better infrastructure, better schools, and better services. This means very little ROI on rising taxes for Chicago residents. This makes the city less appealing to all but the wealthy, who rely less on public services. A middle class income can no longer pay for a middle class lifestyle in Chicago. The following quote from Illinois Policy turns our attention back to zoning laws:
“Much of Chicago outside the downtown area is zoned only for single-family homes; and even downtown faces restrictions on the size of buildings.”
Developers are legally not allowed to build multi-family homes in Chicago’s most desirable neighborhoods, like Lincoln Park. This policy reduces supply. It prevents people, even wealthy, from upgrading to new homes. The gist of the Illinois Policy Institute is that zoning laws should reflect the demographic of the area, allowing developers to respond to the demand from buyers over what kind of homes they need. And if they aren’t, zoning laws should no longer be the authority in such matters. With Chicago’s current zoning laws, developers can’t come in and replace units lost to construction of single family homes where multi-family used to exist. Normally, the ebb and flow between single family and multifamily supply and demand means that neither gets stretched too far one way or the other. When supply or demand gets stretched too far on way or there other, prices rise or fall too far and too fast, which ultimately is bad for everyone, as the 2008 real estate crisis showed. What is really happening? Illinois Policy Institute says,
“The city’s inflexibility when it comes to zoning rules triggers a ripple effect. As a result of these laws, developers cannot build more housing in desirable neighborhoods, and residents are then pushed out of the most desirable areas due to restrictions in housing supply. When residents move to lower-cost neighborhoods nearby they push up prices in those neighborhoods and displace those residents. The constant pressure pushing people farther out of the city has been identified as a major contributor to urban sprawl and Chicago’s traffic problems.”
That last point is incredibly poignant, and not something we would normally think of. This constant pushing of residents further and further out of the city has contributed to urban sprawl, which in turn has contributed to the absolutely horrible traffic that has become a fact of life in the metro area interstate arteries (I-94, I-90, I-290, I-294).
In my opinion, the reason why Chicago is pursuing the zoning policy it is pursuing is because it has an infrastructure crisis. The city is trying to restrict development of multi-family units, because the city’s infrastructure simply cannot handle population growth. Everything from sewer, to water, to electricity, to roads, to schools, is strained in Chicago. The city has chosen to allow the building of high priced, high taxed properties, and only those properties, as a way to maintain suitable property tax revenue, with less strain on public resources. Filling Chicago’s neighborhoods with luxury real estate occupied by affluent, wealthy constituents, also serves the purpose of attracting other affluent people to the city. In effect, the city wants Chicago be a haven for the affluent. Mayor Rahm Emanuel sees a transformation in the demographic of Chicago’s constituency as the only way the city can survive moving forward into the future. Given the debt obligations the city faces going out decades into the future, that fresh, new, affluent, un-jaded demographic, may be the only option the city has to maintain tax receipts.
Affordable housing in Lincoln Park, and other Chicago neighborhoods, will soon be a thing of the past. I’ll finish with one last point regarding the housing situation in Lincoln Park. In 1926, a case was heard in the US Supreme Court known as Euclid vs Ambler. The ultraconservative justice George Sutherland wrote the decision, and the Court endorsed it. In that decision, the court ruled 6 to 3 that multi-family housing (which it termed, “commercial”) ought to be excluded from single and two-family home residential districts. It was, “
“…a seal of approval from the judicial branch of the federal government…zoning’s future was assured.”
At the very least, this ruling was the beginning of segregation based on socio-economic status. George Sutherland specifically cites multiple dangers that multi-family residences present to a neighborhood:
“…disturbing noises incident to increased traffic and business, and the occupation, by means of moving and parked automobiles, of larger portions of the streets, thus detracting from their safety, and depriving children of the privilege of quiet and opens space for play, enjoyed by those by those in more favored localities -…”
Notice that in his decision, he appeals to human senses, specifically our hearing, and our desire to have silence rather than moving cars and honking horns. In his decision, he describes multi-family residences as “commercial” property, as opposed to “residential”. This is significant, as it allowed such property to exist near industrial areas, exposing those residents to all the dangers that come with that. It was all done to create residential havens for single family home owners. Finally, Justice Sutherland concludes the above excerpt by writing,
“…until, finally, the residential character of the neighborhood and its desirability as a place of detached residences are utterly destroyed.”
He uses the words, “utterly destroyed”, as a way of tying into every American’s right to protect his/her private property (granted in the 5th Amendment Constitution). He essentially tells us that his decision is justified by the people’s right to protect their property. The safety, quietness, and desirability of residential property must be protected as a consequence of the 5th Amendment, and so in Euclid vs. Ambler, zoning was upheld.